Muddying the Budget Waters

In the fight over the federal budget, Social Security has been put on the table, although it has not contributed to the deficit.

TARA SIEGEL BERNARD

All the political wrangling over the budget in Washington has been focused on one theme: how much the government should cut and when those cuts should take effect.

But for all of the difficulty lawmakers are having now, their hardest decisions may come this fall when they do battle over which government programs to cut back. And one program that has already been put on the table for discussion is Social Security, even though it has not contributed to the budget deficit.

There is no question the program needs to be tweaked so it can remain solvent for decades to come. And experts say the problem is not that difficult to solve, as long as it is dealt with relatively soon.

The proposed changes would have tinkered with one of the most beloved features of Social Security: the cost of living adjustment, which helps benefits keep pace with inflation so the elderly maintain their purchasing power. The proposed changes would link benefits to a new measure of inflation — one that is projected to rise more slowly than the current index.

“It amounts to a benefit cut,” Alicia H. Munnell, the director of the Center for Retirement Research at Boston College, said.

The proposal, which emerged as a potential bargaining chip earlier in the budget debate, caused Social Security preservationists to cringe. And that is a big reason they argue that any changes should not be fast-tracked as part of the broader deficit debate.

If no changes are made, the program’s reserves are now projected to be exhausted in 2036, a year earlier than last year’s projection. Then the taxes collected would be enough to pay only about 75 percent of benefits through 2085, according to the latest annual report from the agency’s trustees.

The shortfall can largely be attributed to demographic shifts. The coming wave of baby boomers will strain the system, while the number of workers paying into the system is declining. On top of that, people are living longer, and the weak economy is not helping matters.

Changing the cost of living adjustment is just one of several ways to bolster Social Security’s finances. Suggestions have included gradually increasing the retirement age or raising the amount of income subject to Social Security payroll taxes.

The Obama administration’s deficit-reduction commission proposed switching to the new type of index because, members said, it would be more accurate. Unlike the current measure, it takes into account that people tend to change their buying habits when prices rise, substituting cheaper items for more expensive ones. If, for instance, the price of apples goes up, people may instead buy pears, if they are cheaper. The current index assumes that if the price of apples go up, people will just buy fewer apples.

But there is a question of whether the elderly and disabled can make the same substitutions as working people. “If you are down to paying your rent and your food, and the price of your food goes up, you probably just eat less,” Ms. Munnell said.

In addition, the slower rise in benefits would compound over time. That means the older that retirees grew, the bigger the pinch they would feel, especially people who depended heavily on the program. About 43 percent of single people and 22 percent of married couples rely on the benefits for more than 90 percent of their income, the Social Security Administration says. More than half of couples and 73 percent of singles draw more than half their income from the program.

So how much would this cost? Over the last decade or so, the “chained CPI-U” — that is the name of the new proposed index — has risen 0.3 percentage points a year less than the measure used now, according to Stephen Goss, the chief actuary at Social Security. And he expects that would continue in the future.

Consider a worker who retired at 65. After 10 years, the worker would receive 3.7 percent less in benefits than he would receive under the current system; after 20 years, 6.5 percent; and 9.2 percent after 30 years, according to Mr. Goss’s calculations. (He ran the numbers in response to a request by Representative Xavier Becerra, a Democrat from California who is the ranking member of the Ways and Means subcommittee on Social Security).

Let’s assume the retiree had a monthly benefit of $1,261, or $15,132 annually. But as he aged, his benefits would not rise as quickly as they would have under the current system. At 75, he would receive $560 less a year under the new system compared with the current one. At 85, he would receive $984 less, and, at 95, he would receive $1,394 a year less. These changes would resolve about 23 percent of the program’s current shortfall, according to Social Security’s actuaries.

But what is most irksome to some critics is that the proposed index has been called “more accurate.” It may be more accurate for the broader population, they say, but that doesn’t necessarily hold for retirees. (It would, however, save $112 billion over 10 years, according to the Congressional Budget Office).

If accuracy, and not cost savings, is the goal, they suggest further analysis of an experimental “elderly” index that accounts for the fact that older people spend a greater share of their budget on medical care. That index is estimated to increase about 0.2 percentage point more each year than the broader indexes. In fact, Ms. Munnell said that moving to the elderly index — and adding the mechanism to account for substituting cheaper items when prices rise — might make more sense.

Referring to the chained CPI-U index, Ms. Munnell said, “It’s not the worst proposal that could be put in place,” especially when considering that other ideas, like providing an increase in benefits at age 85, could offset some of the reduction. “It’s just that people aren’t candid when they talk about it. That’s the real problem.”

And that is the issue hanging like a dark cloud over the broader discussion to bolster Social Security, especially in such a politically charged atmosphere.

Many people misunderstand how the program operates. Payroll taxes stream into the trust fund that is used to pay current retirees’ benefits. When there is a surplus, that money is invested in a special type of Treasury bond that pays interest to the trust fund. At the end of last year, the trust fund had about $2.6 trillion. And though last year was the first year since 1983 that the fund paid out more than it received in tax revenue, it still continued to grow because of the interest accrued — and it is estimated to continue to grow through 2022.

Since the money in the trust fund is held in Treasury securities, taxes collected are essentially being lent to the federal government to pay for whatever it wants (and this allows the government to borrow less from the public). That is where some of the confusion comes into play about how Social Security is used to pay for things that are unrelated to the program. But it is really no different from China lending the government money by investing in Treasuries.

“Social Security does not, and cannot by law, add a penny to the federal debt,” said Nancy Altman, co-director of Social Security Works, an advocacy organization that promotes the preservation of the program. “It, by law, cannot pay benefits unless it has sufficient income to cover the cost, and it has no borrowing authority to make up any shortfall.”

And, she added, it is not in crisis. “Its long-range funding shortfall should be dealt with on its own legislative vehicle, separate from deficit-reduction talks and after those talks are concluded,” she added.

The budget proposal from the bipartisan group of Congressmen known as the Gang of Six and the president’s deficit-cutting commission did state that Social Security should be reformed for its own sake — and that any savings must go toward solvency. There are many ideas on how to achieve that balance. Here’s hoping our leaders will evaluate them on their own merit.